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Cross-Border Trade and FDI in Services
by
Carmen FILLAT-CASTEJÓN Joseph FRANCOIS*)
Julia WOERZ
Working Paper No. 0812 September 2008
DDEEPPAARRTTMMEENNTT OOFF EECCOONNOOMMIICCSSJJOOHHAANNNNEESS KKEEPPLLEERR UUNNIIVVEERRSSIITTYY OOFF
LLIINNZZ
Johannes Kepler University of LinzDepartment of Economics
Altenberger Strasse 69 A-4040 Linz - Auhof, Austria
www.econ.jku.at
*)[email protected] phone +43 (0)70 2468 -8239, -8238 (fax)
Cross-Border Trade and FDI in Services
Carmen Fillat-Castejón
University of Zaragoza
Joseph F. Francois
CEPR and University of Linz
Julia Woerz
Oesterreichische Nationalbank , Foreign Research Division
September 2008
Abstract: Working with a panel dataset of of OECD countries over the decade 1994-2004, we examine linkages between cross-border trade and FDI in the service sectors. We first develop a consistent analytical framework for the application of the gravity model jointly to services trade and commercial presence (i.e. FDI), using a composite model of delivery that offers testable hypotheses about the roles of different modes of services supply as complements or substitutes. We further link our estimates to policy variables measuring market regulations that may act directly or implicitly as barriers to trade. We find robust evidence of complementary effects in the short-run, which is reinforced in the long run by an increased potential for cross-border imports based on previous FDI inflows. A detailed analysis by individual service sectors highlights business, communication and financial services as showing the largest potential for cross-border trade when market regulations are reduced and when commercial presence increases. Keywords: FDI, imports, services, panel data, substitution and complementary effects. JEL codes: F10, F14, F21 This research has benefited from support from the Stichting IIDE, the World Bank, and the wiiw (Vienna). All opinions expressed herein are of course those of the authors, and are not meant to reflect the position or opinion of any institution with which any of the authors have been or are currently affiliated. Address for correspondence: Prof. J. Francois, Dept of Economics, University of Linz,
Altenbergerstraße 69, A!4040 Linz, Austria. [email protected].
1
1. Introduction
Whether or not cross-border trade and foreign direct investment (FDI) act as complements or substitutes
in delivering goods across borders is not a new question. What is new in the literature is a recent attention
to services, as distinct from goods. Fontagné and Pajot (1999) provide a comprehensive overview of the
rich pool of literature dealing with the subject as it relates to goods. They stress that this relationship
depends on the level of analysis. At the firm level one will expect them to be substitutes, while there are
compelling reasons - based on New Trade Theory arguments - for a complementary relationship at the
macro-level (Pfaffermayr 1996). Given these distinctions, which are extended in Egger and Pfaffermayr
(2005) to include further the magnitude of plant set-up costs compared to trade costs, the empirical
findings up to date have remained inconclusive. Fontagné and Pajot (1999) have ascribed this to a
confusion of effects at different levels of the economy (firm, industry and macro level) and to differences
between vertical and horizontal FDI, two points that are both widely accepted in the literature (Zarotiadis
and Mylonidis 2005, Egger and Pfaffermayr 2005, among others). Reading through the empirical literature
suggests that the case for complementarity between trade and FDI is stronger for vertical FDI and rather
low trade costs. This is intuitively compelling given that the majority of FDI takes place between high-
income developed countries, where vertical FDI is expected to play a greater role than between partners
at different levels of economic development.
Both types of relationship are consistent with viewing trade and FDI as two equivalent modes for
the international provision of goods. Cross-border trade and FDI can therefore be seen as two modes for
firms to deliver goods internationally. When we turn to services, the General Agreeent on Trade in
Services (the GATS) actually explicitly lists four different modes for producer delivery of services across
international borders – cross border delivery, movement of consumers, firm establishment, and
temporary movement of persons linked to services. The most important of these are cross-border trade
(known in GATS-speak as ‘mode 1’) and sales through local establishments, i.e. through FDI (known in
GATS-speak as ‘mode 3’). Mainly due to data limitations, the question of whether these different modes
act as complements or substitutes in services trade has rarely been dealt with in the literature. 1
There are reasons to believe that the relationship between cross-border trade and FDI may well
be different for services than for merchandise. Banga (2005) points out that while the determinants for
FDI are generally found to be the same for goods producing firms and for services delivering ones, the
importance of these determinants differ strongly between the two sectors. Government regulations,
policies, cultural distance and the tradability of services (influenced by technological progress as well as by
economic policy and regulatory measures) are the prime factors influencing FDI in services. In contrast,
1 The approach taken in the literatrure is gravity modelling. An early example looking at different services sectors, based on bilateral U.S. services trade data, is Francois (1993). More recently, Fortagné (1999), Magaläes and Africano (2007), FDI, Hejazi and Safarian (2001) and Bos and van de Laar (2004, look at total service trade and FDI. At a sector level, see Buch and Lipponer (2007) for German banks, Moshirian (2001) and Moshirian et al (2005) for banking, and Li et al (2003) for insurance. services.
2
market size, barriers to trade and cost differentials in production are the main determinants for FDI in
goods.
Evidence on whether cross-border and establishement modes of international service delivery act
as complements or substitutes is thin and inconclusive. Some studies find no evidence, like Brenton et al
(1999) for the aggregate, or even mixed results when individual products or countries are studied, like
Bloningen (2001), Pain and Wakelin (1998) or Fontagné and Pajot (2000). Moshirian (1997) does find a
substitutive relationship for insurance services, as do Kolstad and Villanger (2004) for a disaggregate set
of four service sectors. The question has immediate policy relevance, as it determines the meaning of
differential liberalization commitments taken under alternative modes. (Francois and Wooton 2001).
In this paper we explore the degree of complementarity between trade and FDI in services over
both short and longer run time horizons. We work with a newly constructed dataset that combines data
for cross border and establishment modes of trade for 28 OECD countries over the period 1994 to 2004,
distinguishing between total services and seven individual service sectors. The next section describes the
data set in more detail, highlighting an apparent short-run interaction between cross-border trade and
FDI in the service sector. In Section 2 we develop our estimating framework from an analytical structure
involving composite delivery modes. Section 3 offers evidence of the short-run relationship between
trade and FDI in services, at the aggregate level and by service, both in the traditional and the new
composite demand approaches. The complementarity between FDI and cross-border trade is
corroborated in section 4 by a long-run analysis, where FDI shows an important long run effect on
services imports. We offer conclusions in Section 5.
2. Data and Basic Trends
Our dataset merges imformation from a number of different sources (IMF, OCED, World Bank). Data
for service imports, covering basically modes 1 and 2, come from published IMF Balance of Payments
Statistics, compiled according to BOP Manual 5. FDI stock data, as a proxy for mode 3 trade, are taken
from OECD Source and classified by the OECD’s own industry classification based on ISIC, revision 3.
The time period covered ranges from 1994-2004. The combination of the two datasets implies that the
sample covers 28 OECD countries.2 The data are mapped to individual service sectors according to the
BOP classification. We have left out sectors where the number of missing observations exceeded the
observations that were actually reported. Thus, we focus on the following categories: total services,
transport, travel, communication, construction, finance, and other business services. We have
approximately 200 observations per service category. All other macroeconomic indicators come from the
World Development Indicators published by the World Bank (i.e. GDP, value added, purchasing power
2 While cross-border trade at the sectoral level (BOP classification) is in principle available for 178 countries in the world, detailed and comparable FDI data by sectors is only available for the OECD members. Consequently our sample contains all OECD countries without Belgium and Luxembourg.
3
parities), while distance is taken from CEPII’s distance dataset and exchange rates are from the IMF
International Financial Statistics.
For measures of regulation, we use the set of OECD Product Market Regulation indicators or
PMR indicators (see Conway et al. 2005). These cluster a variety of different regulatory measures into
three groups: barriers to entrepreneurship, state control and barriers to trade and investment. Barriers to
entrepreneurship and state controls are essentially inward oriented regulations; trade and investment
barriers act as outward oriented regulations, and are more likely to be affected by international
negotiations. The latter are split into foreign ownership barriers, regulatory barriers and tariffs. The
indicators are normalized to a scale between 0 and 6, higher values indicating more burdensome
regulation.
We focus on the interaction between the two modes of supply, namely across the border
(including here also movement of consumers) and through foreign establishment. We would ideally
measure mode 3 trade by the sales of foreign affiliates in the service sector. However, such data only exist
for a limited number of countries. Indeed, the U.S. is more or less the only country that publishes
comprehensive FATS statistics on a consistent basis. Therefor, without apology we use service sector
FDI stocks in the country as a very rough proxy for service supply through foreign establishment.
Estimates by the World Bank (Hoekman 2006) indicate that this is reasonable, and that for the US the
ratio between inward FDI stocks in services and trade through foreign affiliates in the same sector is
about 3:1. This means we can roughly quantify the importance of mode 3 trade by taking one-third of
FDI stocks. This scaling effect has to be considered when interpreting the figures presented below.
Trade in services has in general risen in the OECD over the past decade. Figure 1 displays the
growth in import volume and FDI inward stocks for total services. One sees an over-proportionate
increase in FDI stocks. Even with our rule of thumb only a third of this can be seen as Mode 3 trade, it
still implies a relative shift towards trade through commercial presence. While a decade ago cross-border
trade was by far the most important mode for trade in services (840 billion USD of service sector FDI
stocks corresponding to 280 billion USD of mode 3 trade as compared to 770 billion USD of cross-
border service imports), by 2004 FDI stocks amounted to 3,300 billion USD while service imports have
just about doubled to 1,300 billion USD for the OECD in total. Thus, towards the end of the observation
period, the two modes have attained equal importance.
Figure 2 shows a sector breakdown of imports through trade and establishment by three main
sectors, transport, travel and the sum of the remaining five categories listed above -- producer services.3 It
becomes evident from Figure 2 that this category is strongly responsible for the high growth of FDI in
the service sector. The tremendous growth in service sector FDI is almost entirely driven by producer
services. Also, it is the most important category for cross-border trade in services in the OECD. Growth
through modes 1 and 2 has not been as impressive as through FDI. However, trade flows have
3 This refers to the sum of communication, construction, finance, insurance and other business services. Due to too many missing observations, this group does not reflect all categories usually labelled “producer related services”. Specifically we are missing out here: computer and information services and royalties and license fees.
4
nevertheless doubled over the past decade in all three categories. Thus, we observe an increase in trade in
services through either mode. This clearly positive trend implies a shift towards trade through foreign
affiliates, though the rough data do not allow us to speculate at this point whether this implies a substitute
relationship or a form of complementarity.
More details about this relationship between different modes of services supply are given in
Figure 3, which plots FDI inward stocks against service imports for all 28 countries for each service
sector separately. The graph shows the average level of cross-border imports and FDI stocks in current
US-Dollar over the period 2001-2004. For all service sectors with the exception of construction services,
we see a positive relationship. Thus, more inward FDI in a country is observed together with more
service imports in the same sector. This very preliminary look at the data suggests a contemporaneous
complementarity between trade and FDI in services.4
3. Linking Trade and FDI in Services
Conceptually, cross-border services trade and foreign affiliate sales may be substitutes or complements.
On net, there are several reasons to expect that they are more often gross complements in production (i.e.
joint inputs) though with some degree of substitution possible. For example, because services require
interaction between provider and consumer (Hill 1977, Francois 1990), it will usually be the case that
cross-border trade in services requires some local value added to facilitate interaction between provider
and consumer. In addition, from available balance of payments and trade data, we observe both trade
and FDI across service sectors. If we are willing to assume that FDI in services is a reasonable proxy for
affiliate sales in services, this means we observe both cross-border and affiliate sales.
In formal terms, we start with a general representation of delivered services S as a composite of
cross-border traded inputs T and affiliate activities F. This may, for example, involve a banking product
supported by headquarter activities but sold and serviced through a local office. Formally, we represent
total foreign sales of services as a CES composite (equation 1), where !=1/(1-") is the Allen-elasticity of
substitution across modes.
S = f F ,T( ) = A aF F( )!
+ aT T( )!( )
1!, 0 " ! " 1 (1)
If sales through affiliates and through cross-border trade (F and T) are prefect substitutes, then
S = A aFF + a
TT( ), ! = 1 (2)
In more general terms, from the first order conditions for cost-minimization starting from (1), we
have the following relationship between cross-border and establishment inputs to final delivery:
4 For the period 1994-1997, the same positive relationship was observed for all services sectors, also for construction services. We had to omit insurance services from the analysis, since data for the complete sample was available only for one year and hence the small number of observations did not allow a meaningful econometric analysis.
5
F = SA!1 a
F
PF
"
# $
%
& '
(
P(
= SA! 1+(( ) a
F
PF
"
# $
%
& '
(
aF
(P
F
1!(+ a
T
(P
T
1!(( )( /(1!( )
T = SA!1 a
T
PT
"
# $
%
& '
(
P(
= SA! 1+(( ) a
T
PT
"
# $
%
& '
(
aF
(P
F
1!(+ a
T
(P
T
1!(( )( /(1!( )
(3, 4)
P = A!1
aF
"P
F
1!"+ a
T
"P
T
1!"( )1/(1!" )
(5)
In equation (5), P is the price of the delivered service S. Normalizing service quantities so that we
represent import demand for delivered services as
S = P!, ! < 0 where ! is the elasticity of demand,
then from equations (3-5),5 it is straightforward to link demand for cross-border and local service sales to
changes in the price of cross-border and local affiliate inputs.
dT
dPF
= ! + "( ) P! +2" #1
aFP
F
#" aT
PT
$
% &
'
( )
"
A" #2
PF
#1
$
% &
'
( )
dT
dPT
= # P! +" a
T
PT
$
% &
'
( )
"
#!aT
"P
T
1#"+ "a
F
"P
F
1#"( ) A" #2
PT
#1
$
% &
'
( )
(6,7
A similar set of equations hold for F. From equation (6), the impact of a drop in the price of providing
local affiliate inputs on cross-border trade depends on the elasticity of substitution between F and T, and
the underlying elasticity of demand for composite services S. If the elasticity of substitution is relatively
low - in particular if
! < " - then they actually serve as gross complements. Alternatively, as long as
! > " , they will serve as gross substitutes.
We have seen dramatic increases in FDI flows in the service industries in the last 10 years, along
with moves to privatize and deregulate service sectors. Liberalization of service sector FDI means a
reduction in the cost of running local affiliates. From equations (3,4) this implies a rising share of local
affiliate relative to cross-border sales. Controlling for overall growth in demand, the theoretical impact
on cross-border sales is ambiguous. From equations (6,7), it will depend on the elasticity of substitution
relative to the elasticity of demand. We can summarize the implications of local service sector
liberalization and related FDI liberalization as follows:
• In the cross-section, net complementarity of F and T means a relatively low technical degree of
substitution
• Over time, increases in total service sales S imply rising both cross-border trade and FDI
• Controlling for shifts in demand, the impact of FDI growth driven by local market liberalization
over time on cross-border trade is ambiguous
5 In Ethier-Krugman-Melitz type models, this elasticity is from the elasticity of substitution across varieties. With appropriate normalizations, such CES demand structures allow aggregation, across firms and regions.
6
Technical change affecting delivery modes has a similar set of implications. In our data, we will look at
both trade-FDI interactions in the cross-section, and at a dynamic panel. In the cross-section,
complementarity will tell us we have a relatively low degree of substitution between cross-border and
local sales of services. In the dynamic panel, we are interested in the relative evolution of cross-border
and affiliate sales.
4. The cross-section view and the impact of regulation
In this section we analyze the effect of inward FDI on services cross-border trade and vice versa from a
short-run point of view. We estimate first the traditional gravity model for cross-country panel dataset,
where we do not control for regulatory interactions and where we capture the complementary or
substitutive effect between FDI and services imports by including trade through the alternative mode as a
further control variable on the right hand side. Since there may be a certain time lag in the relationship,
we use here the first lag of the alternative mode. Our estimating equations are given below:
ln Mit
= b0,M
+ b1,M
lndistit
+ b2,M
lnGDPit
+b3,M
ln POPit
+ b4,M
ln FDIi ,t !1
+ eM ,it
ln FDIit
= b0,F
+ b1,F
lndistit
+ b2,F
lnGDPit
+b3,F
ln POPit
+ b4,F
ln Mi ,t !1
+ eF ,it
(8,9)
In equation (8), Mit is the total cross-border service imports for country i and year t; FDIit are total FDI
stocks in the services sector in country i and year t, GDP is the gross domestic product for country i and
year t (measured in current international dollars), POP is the population of the host country, and dist is a
GDP-weighted average distance term for the host country to all potential trading partners. The dist term
can be seen as an index of general remoteness of the country). Finally e represents error terms with an
unobservable country-specific component and a remainder disturbance. We estimate the within or fixed
effects model where the country-specific effect and all the regressors are assumed to be independent of
the disturbance. The bias of omitting variables is controlled for in this way. (Recall that we have a sample
of 24 countries over 10 years, although there are some missing values in this sample . Data sources are
described in the previous section.)
Tables 1A and 1B show the estimation results for the traditional, uncontrolled gravity approach in
the first column. Services imports receive a significant complementary effect from commercial presence
(Table 1A), but we do not find this complementary relationship to be significant in the opposite direction.
From the regression results, no significant evidence for a trade impact of cross-border imports upon
commercial presence is found (Table 1B).
From our discussion of composite delivery, equations (6) and (7), and corresponding versions for
FDI, point to an impact of cost factors in one mode (like regulatory restrictions) in delivery through the
alternative modes. This suggest testing for interaction between cross-border and establishment modes by
7
focusing on this impact, which follows from the cross price effects in equations (6) and (7). To implement
this formally, we work with an augmented gravity equation where the barriers on alternative modes for
services trade are controlled:
ln Mit
= c0,M
+ c1,M
lndistit
+ c2,M
lnGDPit
+ c3,M
ln POPit
+c4,M
ln PMRit
+ c5,M
PMRit( ) ln FDI
i ,t !1( ) + eM ,it
ln FDIit
= c0,F
+ c1,F
lndistit
+ c2,F
lnGDPit
+ c3,F
ln POPit
+c4,F
ln PMRit
+ c5,F
PMRit( ) ln M
i ,t !1( ) + eF ,it
(10,11)
In equations (10) and (11), PMR is an index of product market regulation controling for explicit
and implicit barriers for services trade through domestic regulation. This comes from the OECD, and is
described in more detail in the data section of the paper. We have tested the price and cross-price effect for
each category of regulation. The advantage of this specification is we decompose the change in trade in
each mode due to changes in regulations into a direct price effect and into cross-price effects working
through the alternative mode to trade the respective service. Taking as an example the services imports
equation,
! ln Mit( ) !PMR
it= c
4,M+ c
5,Mln FDI
i ,t "1 (12)
Here, the term c5,M indicates the complementary or substitutive effect received from FDI when the barrier
restricting this mode changes. From equations (6,7), this effect depends on the demand and substitution
elasticities, and measures net cross-price effects. The results of these price effects for total trade in services
are presented in the remaining columns of Tables 1A and 1B.
At first glance, variation in product market regulations in general is affecting trade within the same
mode directly and through the respective other mode. We see in both panels of Table 1 a negative direct
price effect, meaning that more regulation impedes trade as expected. This results from the interpretation
of higher values of the PMR indicators with more burdensome regulation and a consequent more restricted
(and higher cost) acces to the corresponding market. The cross-price effect, working through the
alternative mode of trade, is always of the opposite sign (positive). This points towards a complementary
relationship, because the negative price effects from an increase in regulations are reflected in a
simultaneous negative effect on the alternative mode. In other words, those countries with higher
regulations experience a lower level of services imports and of foreign commercial presence, which is much
lower because of the complementarity between both modes of trade. In more detail, the incidence of
individual aspects of regulation differs between modes (cross-border and through FDI). For services
imports we see significant negative effects from higher trade and investment barriers - due to foreign
ownership regulations - and from state controls; cross-border imports also receive a positive cross-price
effect from inward oriented regulations, though here we do not find a significant direct price effect. For
trade through foreign establishment (proxied by FDI) we find a direct negative price effect from all aspects
of regulation with the exception of tariffs. Cross-price effects (working through corss-border trade) are
significant only when looking specifically at inward oriented regulations (here arising from barriers to
8
entrepreneurship) and trade and investment barriers – here stemming from regulatory burdens and
restrictions on foreign ownership. For all aspects of regulation we find evidence for complementarity
between FDI and services imports. Foreign ownership barriers stand out as the only category with a
reciprocal relationship where both direct price and indirect cross-price effects significantly affect trade
through both modes. In summary, in the short-run there is evidence of significant complementarity
between cross- border trade and commercial presence in aggregate services.
Since total services comprise a very heterogeneous collection of highly different activities, it is
interesting to analyse the relationship between individual modes of delivery and their reaction on regulatory
changes for each service sector separately. For this we have replicated the set of estimates for each service
activity separately. The price and cross-prices elasticities are summarized in Tables 2A and 2B. The
evidence is more disperse with fewer instances of evidence for complementarity than for total services.
Looking at the estimates for cross-border trade, we can highlight one service sector with evident
complementary effects that stands out because most of regulations show a significant direct and
complementary effect. Communication services show a strong evidence of complementarity in their
response to all regulatory changes, except the regulatory obstacles to trade and investment. We also find
some evidence for significant effects of regulatory barriers for other business and financial services. In the
latter case – like for transportation services - we find an unexpected positive direct effect from higher
tariffs on trade value. This may be explained by a statistical peculiarity in the case of transportation
services, which are often constructed from merchandise trade flow statistics. Higher tariffs might increase
the costs of shipping goods, which may falsely be counted as being part of the transportation service.
Table 2B shows weaker evidence for FDI, with only some direct price effects for communication,
construction and financial services. Transportation services again show an unexpected positive direct effect
from tariffs.
To sum up, we find a robust complementary effect between commercial presence and cross-
border trade in services, which is not always captured when we do not control for cross-pice effects linked
to regulation. The composite delivery approach allows us to capture this effect through the cross-price
effect when changes in product market regulations (being an indication of market access barriers) which
affect both FDI and cross-border trade are taken into account. From this perspective the complementarity
is clearly reciprocal between the two modes of supply. This is especially true when obstacles to foreign
ownership are considered. Looking at individual service sectors, we again find a complementary
relationship when the service activity shows a significant direct reaction to changes in the regulatory
environment. The sensitivity towards such changes differs however between service sectors, with some of
them, such as communications services, responding to all facets of regulation, some others being
responsive to certain aspects of regulation - financial and other business services – while the rest –
construction and communication – hardly show any sensitivity. At the detailed sector level the evidence for
complementary effects through FDI on corss-border trade is generally stronger than for the opposite
direction, though this varies by sector.
9
5. Complementarity over time: trade through FDI
Having established complementarity between FDI and cross-border imports in the short-run, we next
focus on how this relationship evolves over time. There is a recent literature on long-run effects and the
causal relationship between international investment and trade in goods (see Barrell and te Velde 2002,
Türkcan 2006, Pramadhani et al 2007, Pacheco-López 2005 or Pain and van Welsum 2004). In this section
we formulate a simple partial adjustment model as used by Pesaran and Smith (1995) and Pesaran et al.
(1999) and apply it to trade in services like in Pain and van Welsum (2004). Unlike Pain and van Welsum,
we include controls for direct and indirect regulatory cost impacts. For our 10-year sample, the estimated
long-run coefficients are meant to test for complementarity or substitution in the long run between
different modes. We start with the following dynamic relationship:
lnYit
= !i
+ "iln X
it+ #
ilnY
i ,t $1+ e
ite
it~IN 0,%
i
2( ) (13)
where Yit is cross-border trade (or the commercial presence respectively), i=1…N is the country and
t=1…10 are years, and Xit denotes the alternative mode of trade. We want to test for the existence of a
long-run relationship between the two modes. In the case of a positive relationship we can consider this as
an indication of complementarity, and the opposite would be a sign of substitution. The associated long-
run coefficients can be derived as
!i
= "i
1# $i
( ). The country-specific intercept picks up all omitted
factors that vary across countries. A convenient re-parametrisation of (13) is:
! lnYit
= "i# 1# $
i( ) lnYi ,t #1
# % i
1# $i
ln Xit
&
' ( )
* + + uit
! lnYit
= "i# ,
ilnY
i ,t #1#-
iln X
it[ ] + uit
(14,15)
From this non-linear equation, we can estimate the long-run parameters of interest:
! and
! . In a first
simple experiment we assume that there are negligible differences between countries in the long-run price
and cross-prices elasticities. This yields estimates that are more or less comparable to our short-run, within
estimates from the previous section.6 The estimating equation then becomes:
! lnYit
= "i# $ lnY
i ,t #1#% ln X
it[ ] + &it
(16)
6 It is well known that the within coefficients show a downward bias when there is heterogeneity between countries or endogeneity in the model. As a first point to note, the composite delivery approach, controlling for cross-price interactions, is likely to minimize the endogeneity problem compared to the uncontrolled one. Secondly, in our sample, only Asian countries show a different behaviour in the evolution of services trade. Moreover, Pesaran et al. (1999) also argue that short-time coefficients are more likely to vary across countries than the long-run parameters. Although we are aware of the simplification of assuming homogeneous coefficients, we can stress that also we would like to keep the same assumptions than in the short-run analysis, where we assumed common elasticities and country fixed effect, and for the initial experiment the main aim is to detect significant relationships. A previous analysis controlling for heterogeneity by including dummies for five different geographic regions revels the downward bias of the within estimation but our elasticities keep their significance regardless whether we control for heterogeneity or not.
10
Estimates for equation (16) are reported in Table 3, both for services imports and for FDI. In addition to
the long-run composite delivery-based estimates (where we control for cross-price regulatory impacts), we
also report traditional (uncontrolled) long-run estimates and a set of short-run estimates based on exactly
the same sample to allow for direct comparison.7
The most striking result is that the direct effect and the indirect complementarity from FDI
towards services imports are both reinforced in the long run, while the evidence becomes weaker in the
opposite direction. Also, the standard (uncontrolled) approach yields a significant complementarity from
FDI towards cross-border trade, but again no evidence from imports to investment. A detailed analysis by
components of regulation indicates that services imports are affected over time not only by changes in
foreign ownership barriers but also by other trade and investment barriers – such as regulatory barriers and
tariffs – and by inward oriented regulations – both barriers to entrepreneurship and state control. In
contrast, for commercial presence, while inward oriented regulations have a significant impact in the short
and long-run, outward oriented trade and investment barriers have only a short-run effect, but this is lost
in the long-run.
The stronger impact and complementarity from commercial presence towards cross border trade
is evident also for individual services. Tables 4A and 4B summarize the price and cross-price effects by
individual service sectors. Table 4A presents the short-run results, and Table 4B reports corresponding
long-run elasticities. The estimates are always based on the long-run sample in order to control for
potential sample bias. Communication services are sensitive to all dimensions of regulation, except
regulatory barriers to trade and investment. The same result was observed in the short-run. Other business
services show a very significant direct price and complementary effect in all regulatory dimensions in the
long run. Financial services, which show complementary effects in the shortrun only when regulatory
barriers to trade and investment change, are sensitive to all kind of regulatory changes, except tariffs, in the
longrun. Construction services never show an effect from any aspect of product market regulation, and
transportation services reveal a significant price effect from all inward oriented regulations together with
foreign ownership barriers but they never receive a significant indirect effect derived from a
complementary relationship with FDI. Furthermore, the counterintuitive positive effects from tariffs in
financial and transport services observed in the short-run seem to be adjusted over time, showing the
expected negative effect in the long run. It also appears that trade and investment barriers in general have
the largest impact in all services. Looking into the subdomains of this index, this trade inhibiting effect
arises primarily from regulatory barriers in business services and financial services, and from controls on
foreign ownership and high tariffs in communication services (see Table 4).
In summary, we have found a complementary relationship between cross-border imports and FDI
triggered by their reaction to changes in outward oriented regulatory measures in the short-run. Over time,
7 It can be noticed also that the short-run results are practically the same for this long-run sample and for the entire sample in the previous section. Only the index for state control is not significant for cross-border imports of services in the long-run sample. The differences in sample size arise from the calculation of growth rates for the long-run approach.
11
our analysis reveals a more stable complementary relationship in reaction to changes in almost all aspects
of regulation, especially so for communication, financial and business services. Some additional
considerations merit further study in this context, such as the impact of country heterogeneity on the
elasticities which we have obtained and the efficiency of the estimation methods used. Our analysis as it
stands shows a significant and robust complementary relationship between the two main modes of services
trade (cross-border and through foreign affiliates) in all producer related services but construction and
transport. The general pattern is also one of a much cleaner view of these relationships over the longrun.
6. Conclusions
In this paper we have focused on the relationships between different modes of services trade. This has
involved testing for whether the most important modes of delivery (cross-border trade and commercial
presence) act as complements or substitutes. The empirical literature uses a traditional gravity approach
when testing for this relationship - often with inconclusive evidence. In contrast, we offer here an
analytical framework for studying cross-border and establishment modes (i.e. and trade and FDI) based on
a model of joint delivery of services. Based on this framework, we work with a new set of estimating
equations that includes not only direct interaction between modes, but also indirect interaction linked to
cross-price effects. We capture these cross-effects through the impact of regulatory indexes. Our
composite delivery approach, which combines FDI and services imports as different ways to serve
domestic demand offers, an avenue for testing the hypothesis of complementarity versus substitution
through the cross-price effects, which we can link directly to measures of existing regulations and other
barriers to trade in services. Our approach predicts a complementary growth between FDI inflows and
cross-border imports when the substitution elasticity is higher than the demand elasticity, and a substitutive
effect in the opposite case.
Working with a new panel dataset spanning OECD trade and FDI in services for 1994-2004, we
estimate both the standard (uncontrolled) and composite delivery approach (where we control for cross-
price effects) model. For the aggregate of total services, the standard approach yields a complementary
effect from FDI towards services imports, which is not significant when looking at the effects of cross-
border imports on FDI. The composite delivery approach reveals a reciprocal complementary relationship
in reaction to changes in domestic regulation (serving as an indicator of implicit and explicit barriers to
trade in services). Moreover, we can distinguish which types of regulations have a larger impact. While
cross-border service imports are more sensitive to outward oriented barriers, trade through local presence
(proxied for by FDI stocks) is sensitive both to inward oriented regulations and trade and investment
barriers and here in particular to changes in barriers restricting foreign ownership. Not all producer service
sectors react alike. We can identify stronger and more stable effects to changes in regulatory regimes in
communication services, where imports receive a clear positive impact from changes in FDI regulations.
12
The short-run evidence is corroborated in the long-run, showing a reinforcement of the
complementary effect that imports receive from FDI when regulations change. The effect from cross-
border trade on FDI is weaker. Total service imports grow directly in response to lowered regulatory
obstacles as measured through any aspect of regulation, and they grow also through the FDI channel, again
indicating net complementarity. On the other hand, FDI in services grows only when inward oriented
domestic regulations are removed, with no impact from outward oriented barriers in the long run. A
detailed analysis by individual service sectors indicates again that cross-border trade in insurance and
business services grows in response to any individual regulations being reduced, and communications and
financial services are sensitive to almost all barriers. Only for transport and construction services imports
do we find no evidence of net complementarity.
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14
Pfaffermayr, M. (1996). “Foreign Outward Direct Investment and Exports in Austrian Manufacturing: Substitutes or Complements? ”, Weltwirtschaftliches-Archiv. 132(3): 501-22 Pramadhani, M., R. Bissoondeeal and N. Driffield (2007), “FDI, Trade and Growth, A causal link?”, Research Paper 0710, Aston Business School. Türckan, K. (2006), “Foreign Direct Investment and Intermediate Goods Exports: Evidence from USA”, ETSG Annual Conference. Windmeijer, F. (2005). “A Finite Sample Correction for the Variance of Linear Two-Step GMM Estimators”, Journal of Econometrics 126(1), 25-51. Zarotiadis, G. and N. Mylonidis (2005), “FDI and Trade in the UK: Substitutes or Complements?”, ETSG Conference, Dublin.
15
Tables and Figures
Figure 1: Growth of Total Trade in Services, OECD members.
Source: IMF BOP Statistics.
Figure 2: Sectoral Pattern of Trade in Services.
Source: IMF BOP Statistics, IMF IFS Statistics.
0
1000
2000
3000
4000
5000
6000
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
US
D b
illion
cross-border FDI
0
200,000
400,000
600,000
800,000
1,000,000
1,200,000
1,400,000
1,600,000
1,800,000
1994 2003 1994 2003
US
D m
illio
n
Transportation Travel Producer Services
16
Figure 3: Correlation between alternative modes by sector, average 2001-2004.
Total Services
0
2
4
6
8
10
12
14
0 5 10 15log (FDI inw ard stock)
log
(cro
ss-b
ord
er
import
s)
Transportation Services
0
2
4
6
8
10
12
0 2 4 6 8 10 12
log (FDI inw ard stock)
log
(cro
ss-b
ord
er
import
s)
Travel Services
0
2
4
6
8
10
12
0 2 4 6 8 10 12
log (FDI inward stock)
Communication Services
0
2
4
6
8
10
0 5 10 15
log (FDI inw ard stock)
log
(cro
ss-b
ord
er
imp
ort
s)
Construction Services
0
1
2
3
4
5
6
7
8
9
-2 0 2 4 6 8 10
log (FDI inward stock)
Financial Services
0
2
4
6
8
10
0 5 10 15
log (FDI inw ard stock)
log
(cro
ss-b
ord
er
imp
ort
s)
Insurance Services
0
2
4
6
8
10
12
0 2 4 6 8 10 12 14
log (FDI inward stock)
Other Business Services
0
2
4
6
8
10
12
0 5 10 15
log (FDI inw ard stock)
log
(cro
ss-b
ord
er
imp
ort
s)
Source: Own calculations based on IMF and OECD data.
17
TABLE 1A. GRAVITY EQUATION. FDI VERSUS SERVICES IMPORTS COMPLEMENTARITY. TOTAL SERVICES IMPORTS. TRADITIONAL
APPROACH
COMPOSITE DELIVERY APPROACH PRICE AND CROSS-PRICE ELASTICITIES
SERVICES IMPORTS product market regulation
entrepreneur barriers
state controls trade & investment barriers
inward oriented regulations
foreign ownership barriers
regulatory barriers tariffs
log (GDP) 0.7125 1.0994 1.2540 1.0219 1.0385 1.1491 0.8871 1.1269 1.1666
4.03 8.88 8.55 8.24 8.57 9.17 7.66 9.23 8.60
log (pop) -0.5907 -0.6562 -0.8323 -0.5158 -0.7151 -0.6505 -0.5996 -0.8166 -0.8685
-1.20 -1.66 -2.03 -1.28 -1.75 -1.68 -1.54 -1.87 -2.29
log (dist) -2.2697 -1.2950 -1.2980 -1.4686 -1.6083 -1.1868 -1.9312 -1.8195 -1.5947
-6.36 -3.25 -2.98 -3.62 -3.75 -3.00 -4.85 -4.00 -3.66
log FDI(t-1) 0.1075 3.11
product market price effect -0.2533
regulation -2.18 cross-price effect 0.0369
2.98
entrepreneur price effect -0.0651
barriers -0.40
cross-price effect 0.0224 1.55
state price effect -0.1637
controls -1.87 cross-price effect 0.0209
2.08
trade & price effect -0.3803
investment -2.90 barriers cross-price effect 0.0451
3.13
inward price effect -0.1626
oriented -1.47
regulations cross-price effect 0.0289 2.65
foreign price effect -0.1999
ownership -3.12
barriers cross-price effect 0.0158 2.18
regulatory price effect -0.1223
barriers -1.01 cross-price effect 0.0150
1.22
tariffs price effect -0.0720
-0.36
cross-price effect 0.0113 0.64
country dummies yes yes yes yes yes yes yes yes yes
groups 24 24 24 24 24 24 24 24 24
adj R2 0.76 0.69 0.71 0.68 0.68 0.69 0.69 0.67 -0.67 obs 190 198 198 198 198 198 198 198 198
Note: figures in bold mean significant. t-statistic in italics.
18
TABLE 1B. GRAVITY EQUATION. FDI VERSUS SERVICES IMPORTS COMPLEMENTARITY. TOTAL SERVICES FDI.
TRADITIONAL
APPROACH
COMPOSITE DEMAND APPROACH PRICE AND CROSS-PRICE ELASTICITIES
FDI product market regulation
entrepreneur barriers
state controls trade & investment barriers
inward oriented regulations
foreign ownership barriers
regulatory barriers tariffs
log (GDP) 3.9123 2.8492 2.9294 2.9169 3.1872 2.7827 3.4689 3.4206 3.4949
12.48 9.79 9.59 9.83 13.17 8.64 13.45 17.99 12.11
log (pop) -2.8099 -1.7855 -2.1818 -2.1557 -1.8965 -2.0190 -2.3035 -2.5517 -2.3503
-2.70 -2.08 -2.27 -2.36 -2.12 -2.31 -2.17 -2.60 -2.51
log (dist) -2.5450 -3.7913 -3.0690 -3.9796 -3.4523 -3.7149 -2.9180 -3.1673 -3.8191
-2.41 -3.51 -2.95 -3.64 -3.20 -3.54 -2.72 -3.08 -3.68
log IMPORTS (-1) -0.0258
-0.11
product market price effect -1.5087
regulation -2.23
cross-price effect 0.1194 1.84
entrepreneur price effect -2.5955
barriers -2.73 cross-price effect 0.2298
2.64
state price effect -0.9144 controls -1.76
cross-price effect 0.0686
1.36
trade & price effect -1.1096
investment -1.76
barriers cross-price effect 0.0890 1.32
inward price effect -1.6811
oriented -2.21 regulations cross-price effect 0.1373
1.96
foreign price effect -0.6778 ownership -2.10
barriers cross-price effect 0.0684
2.08
regulatory price effect -3.1219
barriers -3.75
cross-price effect 0.3293 3.64
tariffs price effect 0.2464
0.50
cross-price effect -0.0394
-0.88
country dummies yes yes yes yes yes yes yes yes yes groups 23 24 24 24 24 24 24 24 24
adj R2 0.77 0.81 0.81 0.82 0.81 0.82 0.80 0.83 0.80
obs 190 198 198 198 198 198 198 198 198
Note: figures in bold mean significant. t-statistics in Italics.
19
TABLE 2A: SUMMARY OF PRICE AND CROSS-PRICE EFFECTS OF REGULATIONS ON CROSS-
BORDER SERVICES, BY SERVICE
1. 2. 3. 4. 5
SERVICES IMPORTS Business
services
Communicati
on services
Construction
services
Financial
services
Transport
services
gravity controls yes yes yes yes yes
product market price effect -0.0622 -0.6487 0.1546 0.2563 -0.0048
regulation -0.41 -2.60 0.48 0.72 -0.05
cross-price effect 0.0191 0.1053 0.0473 0.0060 -0.0248
1.16 4.04 0.73 0.14 -1.49
entrepreneur price effect 0.2610 -0.8011 -0.4090 1.2758 0.1889
barriers 1.80 -4.20 -0.87 2.44 0.94
cross-price effect -0.0075 0.0885 0.0336 -0.0469 -0.0278
-0.44 3.61 0.53 -1.00 -1.55
state price effect -0.0618 -0.4225 0.1545 0.1750 -0.0556
controls -0.59 -2.23 0.64 0.77 -0.73
cross-price effect 0.0130 0.0606 0.0346 -0.0024 -0.0132
1.12 3.20 0.75 -0.07 -1.26
trade & price effect -0.1772 -0.9984 0.0169 -0.3391 0.0922
investment -1.75 -3.88 0.04 -0.80 1.08
barriers cross-price effect 0.0340 0.1636 0.0640 0.0207 -0.0346
1.92 5.13 0.72 0.39 -1.54
inward price effect 0.0390 -0.5740 0.1112 0.5310 -0.0175
oriented 0.28 -2.64 0.32 1.64 -0.14
regulations cross-price effect 0.0111 0.0757 0.0387 -0.0011 -0.0185
0.73 3.40 0.71 -0.03 -1.35
foreign price effect -0.0838 -0.4679 0.0513 -0.2168 -0.0623
ownership -1.46 -4.49 0.28 -0.96 -1.15
barriers cross-price effect 0.0104 0.0911 0.0183 0.0103 -0.0162
1.33 5.94 0.46 0.37 -1.56
regulatory price effect -0.2724 -0.1407 -0.3038 -0.8247 -0.2008
barriers -3.02 -0.36 -0.43 -1.99 -1.39
cross-price effect 0.0653 0.0355 0.0818 0.0769 0.0584
3.37 0.66 0.58 1.68 1.71
tariffs price effect 0.1308 -0.4452 0.0472 1.1370 0.2968
1.42 -2.12 0.10 2.69 2.46
cross-price effect -0.0088 0.0481 0.0212 -0.0959 -0.0355
-0.69 1.97 0.30 -2.06 -2.14
obs 107 115 143 178 101
Note: Each cell corresponds to a separate gravity regression. Detailed estimations in Appendix 1A. Figures in bold
mean significant at the 10% level or more; t-statistics in italics.
20
TABLE 2B: SUMMARY OF PRICE AND CROSS-PRICE EFFECTS OF REGULATIONS ON FDI, BY
SERVICE
1. 2. 3. 4. 5
FDI Business
services
Communicati
on services
Construction
services
Financial
services
Transport
services
gravity controls yes yes yes yes yes
product market price effect 0.4660 0.4028 -0.8930 -0.7023 0.0376
regulation 0.28 0.63 -2.05 -1.80 0.02
cross-price effect -0.0922 -0.0951 0.0476 0.0349 -0.0990
-0.52 -0.89 0.85 0.79 -0.51
entrepreneur price effect 2.1196 -14.3930 -0.1692 -0.2798 2.3042
barriers 0.80 -2.52 -0.33 -0.64 0.98
cross-price effect -0.2166 0.0627 0.0011 0.0272 -0.3043
-0.80 0.68 0.02 0.59 -1.22
state price effect 0.5465 0.2097 -0.4790 -0.5553 -0.2178
controls 0.45 0.40 -1.62 -2.01 -0.18
cross-price effect -0.0666 -0.0624 0.0305 0.0176 -0.0286
-0.52 -0.76 0.82 0.58 -0.21
trade & price effect 1.1757 11.6320 -0.8438 -0.6011 0.0253
investment 0.73 1.62 -2.01 -1.43 0.02
barriers cross-price effect -0.2178 -0.1731 0.0588 0.0459 -0.0644
-1.07 -1.27 0.83 0.70 -0.27
inward price effect 0.7832 -0.6636 -0.6827 -0.6446 0.2045
oriented 0.44 -1.08 -1.63 -1.68 0.12
regulations cross-price effect -0.0895 -0.0294 0.0339 0.0321 -0.1151
-0.50 -0.34 0.70 0.84 -0.63
foreign price effect 0.6240 0.7570 -0.3057 -0.2615 -0.1422
ownership 0.79 1.72 -1.63 -1.04 -0.16
barriers cross-price effect -0.1061 -0.0710 0.0290 0.0197 -0.0095
-1.12 -1.02 0.81 0.58 -0.08
regulatory price effect 1.5535 -0.8522 -0.9596 -0.9030 0.2521
barriers 0.61 -1.05 -1.48 -1.08 0.13
cross-price effect -0.2411 0.2456 0.0890 0.1287 -0.0944
-0.71 1.40 0.75 0.91 -0.35
tariffs price effect -0.0236 -0.1966 0.2329 -0.3838 3.6316
-0.01 -0.32 0.55 -1.19 2.68
cross-price effect -0.0167 -0.0872 -0.0136 0.0208 -0.4051
-0.09 -0.92 -0.26 0.54 -2.43
obs 107 115 143 178 101
Note: Each cell corresponds to a separate gravity regression. Detailed estimations in Appendix 1B. Figures in bold mean significant at the 10% level or more; t-statistics in italics.
21
TABLE 3: LONG RUN VERSUS SHORT RUN ESTIMATION . TOTAL SERVICES IMPORTS AND FDI.
SERVICES IMPORTS FDI
LONG RUN SHORT RUN (1) LONG RUN SHORT RUN (1)
TRADITIONAL COMPOSITE
DEMAND
COMPOSITE
DEMAND
TRADITIONAL COMPOSITE
DEMAND
COMPOSITE
DEMAND
APPROACH APPROACH APPROACH APPROACH APPROACH APPROACH
country dummies yes yes yes yes yes yes
gravity controls yes yes
equilibrium correction ( ) -0.0653 yes -0.0033 yes
-3.56 -0.09
log FDI (-1) 1.2698
7.33
log IMPORTS (-1) 17.1519
0.10
product market price effect -3.0970 -0.2155 -19.6094 -1.7131
regulation -5.09 -1.80 -1.77 -2.75
cross-price effect 0.3128 0.0309 1.6663 0.1450
4.29 2.38 1.51 2.42
entrepreneur price effect -3.4875 -0.0212 -26.9023 -3.1044
barriers -5.60 -0.12 -4.38 -3.75
cross-price effect 0.3248 0.0163 2.3448 0.2777
5.07 1.03 4.04 3.66
state price effect -2.1423 -0.1377 -12.8625 -1.1844
controls -4.93 -1.51 -2.09 -2.55
cross-price effect 0.2265 0.0172 1.0661 0.0992
4.13 1.60 1.72 2.21
trade & price effect -4.0755 -0.3294 -2,500.0000 -1.1383
investment -4.11 -2.53 -0.01 -1.73
barriers cross-price effect 0.4228 0.0387 276.4362 0.0991
3.65 2.68 0.01 1.40
inward price effect -2.6390 -0.1302 -17.4365 -2.0770
oriented -5.36 -1.11 -3.16 -3.18
regulations cross-price effect 0.2671 0.0237 1.4716 0.1773
4.57 2.04 2.71 2.99
foreign price effect -1.7170 -0.1867 -22.9961 -0.7150
ownership -4.31 -2.86 -0.59 -2.10
barriers cross-price effect 0.1667 0.0133 2.2404 0.0739
3.43 1.80 0.56 2.11
regulatory price effect -2.4710 -0.0921 -45.4919 -2.6277
barriers -1.67 -0.78 -0.53 -2.81
cross-price effect 0.2247 0.0117 4.9169 0.2767
1.49 0.98 0.52 2.74
tariffs price effect -4.1267 -0.0177 -47.8577 0.1621
-4.19 -0.08 -0.78 0.31
cross-price effect 0.4016 0.0062 4.3394 -0.0301 4.04 0.33 0.76 -0.64
Observations 190 180 180 173 172 172
(1) Short run estimation for the composite demand approach with the long run sample, to control for potential sample bias. Note: Figures in bold mean significant coefficients at 10%-level or more; t-statistics in italics.
22
TABLE 4A: SUMMARY OF SHORT RUN EFFECTS OF REGULATION ON CROSS-BORDER
SERVICES. BY SERVICE. LONG RUN SAMPLE (1).
1. 2. 3. 4. 5.
SERVICES IMPORTS Business services Communication
services
Construction
services Financial services Transport
services
gravity controls yes yes yes yes yes
country dummies yes yes yes yes yes
product market price effect -0.0949 -0.7121 0.1747 -0.0264 -0.0047
regulation -0.59 -2.63 0.55 -0.08 -0.06
cross-price effect 0.0187 0.1169 0.0555 0.0372 -0.0116
1.00 4.01 0.82 0.90 -0.68
entrepreneur price effect 0.2663 -0.8406 -0.3694 0.8619 0.1098
barriers 1.69 -3.79 -0.80 1.66 0.59
cross-price effect -0.0109 0.0915 0.0353 -0.0142 -0.0155
-0.55 3.25 0.54 -0.31 -0.86
state price effect -0.0811 -0.4675 0.1568 -0.0022 -0.0325
controls -0.72 -2.29 0.65 -0.01 -0.52
cross-price effect 0.0123 0.0712 0.0427 0.0234 -0.0040
0.90 3.49 0.92 0.73 -0.37
trade & price effect -0.1963 -1.1082 -0.0071 -0.6128 0.0507
investment -1.86 -4.14 -0.02 -1.50 0.62
barriers cross-price effect 0.0338 0.1786 0.0703 0.0579 -0.0186
1.67 5.25 0.75 1.11 -0.81
inward price effect 0.0202 -0.6085 0.1268 0.2567 0.0117
oriented 0.13 -2.55 0.38 0.87 0.11
regulations cross-price effect 0.0107 0.0843 0.0438 0.0255 -0.0078
0.60 3.39 0.78 0.75 -0.56
foreign price effect -0.0986 -0.5583 0.0619 -0.3613 -0.0651
ownership -1.53 -4.85 0.31 -1.71 -1.46
barriers cross-price effect 0.0094 0.1051 0.0225 0.0326 -0.0105
1.03 5.87 0.55 1.33 -1.05
regulatory price effect -0.2786 -0.2039 -0.1904 -1.1752 -0.0856
barriers -2.66 -0.44 -0.24 -2.73 -1.02
cross-price effect 0.0643 0.0446 0.0572 0.1202 0.0280
2.74 0.71 0.37 2.33 1.41
tariffs price effect 0.1189 -0.4756 -0.0518 0.9513 0.2054
1.26 -2.10 -0.11 2.44 1.76
cross-price effect -0.0060 0.0516 0.0299 -0.0763 -0.0211
-0.46 2.00 0.41 -1.77 -1.24
obs 99 104 131 160 89
Note: Each cell corresponds to a gravity regression. Detailed estimations in Appendix 3A. (1) Short run estimation for the composite demand
approach with the long run sample, to control sample bias. Figures in bold mean significant. t-statistics in italics.
23
TABLE 4B: SUMMARY OF PRICE AND CROSS-PRICE EFFECTS OF REGULATIONS ON CROSS-
BORDER SERVICES, BY SERVICE. LONG RUN.
1. 2. 3. 4. 5.
SERVICES IMPORTS Business services Communication
services
Construction
services Financial services Transport
services
country dummies yes yes yes yes yes
product market price effect -1.4364 -2.0730 2200.0000 -2.1615 -0.8271
regulation -4.00 -4.91 0.09 -2.13 -2.51
cross-price effect 0.2147 0.2721 3000.0000 0.2400 0.0570
2.77 3.70 . 1.81 1.11
entrepreneur price effect -1.6331 -2.034 0.1267 -2.5525 -1.1346
barriers -3.44 -4.15 0.15 -1.94 -2.13
cross-price effect 0.2128 0.2598 0.0607 0.2607 0.0659
2.99 3.27 0.47 1.93 1.25
state price effect -0.9956 -1.3710 0.2734 -1.4280 -0.6884
controls -3.83 -4.23 0.57 -2.10 -2.77
cross-price effect 0.1507 0.1821 0.0966 0.1676 0.0408
2.83 3.60 1.12 1.76 1.09
trade & price effect -1.8715 -3.1522 0.2231 -3.1667 -0.6729
investment -3.72 -4.82 0.25 -2.38 -1.98
barriers cross-price effect 0.3657 0.4335 0.0826 0.3666 0.0912
2.69 4.25 0.47 1.99 1.28
inward price effect -1.2418 -1.6426 0.3473 -1.8564 -0.8824
oriented -3.70 -3.99 0.57 -2.07 -2.42
regulations cross-price effect 0.1827 0.2186 0.1033 0.2024 0.0522
3.02 3.22 0.99 1.85 1.17
foreign price effect -0.9669 -1.4465 0.4238 -1.6724 -0.4964
ownership -4.20 -3.95 0.95 -2.57 -3.24
barriers cross-price effect 0.1166 0.1984 0.0027 0.1904 0.0198
2.22 3.14 0.03 2.00 0.65
regulatory price effect -2.1842 -1.4691 1.8707 -4.5347 -0.7106
barriers -2.40 -0.76 1.12 -2.86 -1.09
cross-price effect 0.5191 0.1651 -0.3539 0.4973 0.1491
2.15 0.60 -1.05 2.58 0.89
tariffs price effect -1.8621 -1.9040 -0.0360 -0.7807 -0.2766
-3.15 -3.82 -0.04 -0.56 -0.66
cross-price effect 0.2734 0.2393 0.0795 0.1029 0.067
2.72 3.19 0.61 0.65 1.34
obs 99 104 131 160 89
Note: Each cell corresponds to a gravity regression. Detailed estimations in Appendix 3B. Figures in bold mean significant coefficients at 10%-
level or more; t-statistics in italics.
24
APPENDIX
25
APPENDIX 1A: COMPOSITE DEMAND APPROACH. SHORT RUN GRAVITY ESTIMATIONS FOR SERVICES IMPORTS.
BUSINESS SERVICES IMPORTS
product entrepreneur state trade & inward foreign regulatory tariffs
SERVICES IMPORTS market barriers controls investment oriented ownership barriers
regulation barriers regulations barriers
log (GDP) 0.6818 1.2484 0.5985 0.5622 0.8714 0.6041 0.7150 1.1089
1.85 4.01 1.69 2.01 2.47 2.22 3.05 3.88
log (pop) 5.7380 5.2785 5.8946 5.9834 5.5106 5.5054 5.0871 4.9187
4.08 3.83 4.21 4.36 4.02 4.01 3.43 3.39
log (dist) -2.2684 -1.9739 -2.3642 -2.3907 -2.0758 -2.5626 -2.5852 -2.1501
-3.32 -3.13 -3.33 -3.66 -3.06 -3.82 -4.05 -3.23
product market price effect -0.0622 regulation -0.41
cross-price effect 0.0191
1.16
entrepreneur price effect 0.2610
barriers 1.80
cross-price effect -0.0075 -0.44
state price effect -0.0618
controls -0.59 cross-price effect 0.0130
1.12
trade & price effect -0.1772
investment -1.75 barriers cross-price effect 0.0340
1.92
inward price effect 0.0390
oriented 0.28
regulations cross-price effect 0.0111 0.73
foreign price effect -0.0838
ownership -1.46 barriers cross-price effect 0.0104
1.33
regulatory price effect -0.2724
barriers -3.02 cross-price effect 0.0653
3.37
tariffs price effect 0.1308
1.42
cross-price effect -0.0088 -0.69
country dummies yes yes yes yes yes yes yes yes
adj R2 0.76 0.78 0.76 0.77 0.76 0.77 0.78 0.76 obs 107 107 107 107 107 107 107 107
Note: t-statistics in italics
26
APPENDIX 1A: COMPOSITE DEMAND APPROACH. SHORT RUN GRAVITY ESTIMATIONS FOR SERVICES IMPORTS.
COMMUNICATION SERVICES IMPORTS
product entrepreneur state trade & inward foreign regulatory tariffs
SERVICES IMPORTS market barriers controls investment oriented ownership barriers
regulation barriers regulations barriers
log (GDP) 2.2240 2.1615 2.1863 2.5245 2.1234 3.0106 3.5887 2.5740
4.87 5.02 4.62 6.73 4.83 8.83 11.50 4.65
log (pop) -14.7150 -15.2790 -14.1418 -15.9232 -14.4560 -18.8694 -16.5355 -13.5479
-6.41 -6.22 -6.03 -7.34 -6.17 -9.22 -6.98 -4.84
log (dist) -2.9730 -3.5086 -3.0919 -2.5465 -3.2923 -2.3854 -1.8397 -2.7246
-1.83 -2.00 -1.85 -1.68 -1.92 -1.71 -1.14 -1.45
product market price effect -0.6487 regulation -2.60
cross-price effect 0.1053
4.04
entrepreneur price effect -0.8011
barriers -4.20
cross-price effect 0.0885 3.61
state price effect -0.4225
controls -2.23 cross-price effect 0.0606
3.20
trade & price effect -0.9984
investment -3.88 barriers cross-price effect 0.1636
5.13
inward price effect -0.5740
oriented -2.64
regulations cross-price effect 0.0757 3.40
foreign price effect -0.4679
ownership -4.49 barriers cross-price effect 0.0911
5.94
regulatory price effect -0.1407
barriers -0.36 cross-price effect 0.0355
0.66
tariffs price effect -0.4452
-2.12
cross-price effect 0.0481 1.97
country dummies yes yes yes yes yes yes yes yes
adj R2 0.61 0.62 0.59 0.63 0.60 0.66 0.55 0.56 obs 115 115 115 115 115 115 115 115
Note: t-statistics in italics
27
APPENDIX 1A: COMPOSITE DEMAND APPROACH. SHORT RUN GRAVITY ESTIMATIONS FOR SERVICES IMPORTS.
CONSTRUCTION SERVICES IMPORTS
product entrepreneur state trade & inward foreign regulatory tariffs
SERVICES IMPORTS market barriers controls investment oriented ownership barriers
regulation barriers regulations barriers
log (GDP) 1.5768 0.4659 1.6075 1.4870 1.3574 1.2435 0.9335 1.1663
1.71 0.67 1.76 1.79 1.63 1.42 1.35 1.68
log (pop) -14.8750 -13.7599 -14.5515 -15.3455 -14.0123 -14.7573 -14.7946 -13.5078
-3.08 -2.89 -3.07 -3.09 -3.02 -2.79 -2.99 -3.02
log (dist) -1.8574 -3.8634 -1.3990 -2.4145 -1.9585 -2.8688 -3.6644 -2.2834
-0.81 -1.74 -0.57 -1.17 -0.80 -1.38 -1.73 -0.98
product market price effect 0.1546 regulation 0.48
cross-price effect 0.0473
0.73
entrepreneur price effect -0.4090
barriers -0.87
cross-price effect 0.0336 0.53
state price effect 0.1545
controls 0.64 cross-price effect 0.0346
0.75
trade & price effect 0.0169
investment 0.04 barriers cross-price effect 0.0640
0.72
inward price effect 0.1112
oriented 0.32
regulations cross-price effect 0.0387 0.71
foreign price effect 0.0513
ownership 0.28 barriers cross-price effect 0.0183
0.46
regulatory price effect -0.3038
barriers -0.43 cross-price effect 0.0818
0.58
tariffs price effect 0.0472
0.10
cross-price effect 0.0212 0.30
country dummies yes yes yes yes yes yes yes yes
adj R2 0.11 0.10 0.12 0.12 0.10 0.10 0.10 0.10 obs 143 143 143 143 143 143 143 143
Note: t-statistics in italics
28
APPENDIX 1A: COMPOSITE DEMAND APPROACH. SHORT RUN GRAVITY ESTIMATIONS FOR SERVICES IMPORTS.
FINANCE SERVICES IMPORTS
product entrepreneur state trade & inward foreign regulatory tariffs
SERVICES IMPORTS market barriers controls investment oriented ownership barriers
regulation barriers regulations barriers
log (GDP) 0.5917 1.7208 0.4649 -0.3626 1.1011 -0.4116 -0.3190 1.2394
0.91 2.67 0.74 -0.53 1.79 -0.58 -0.55 2.18
log (pop) 4.3765 3.3834 4.5932 5.4970 4.1860 5.3602 5.3834 2.2728
1.45 1.33 1.48 1.54 1.48 1.54 1.59 1.07
log (dist) -2.5149 -1.6652 -2.7471 -3.9409 -1.6542 -4.0692 -3.7429 -2.4248
-1.28 -0.88 -1.34 -2.11 -0.84 -2.09 -2.01 -1.24
product market price effect 0.2563 regulation 0.72
cross-price effect 0.0060
0.14
entrepreneur price effect 1.2758
barriers 2.44
cross-price effect -0.0469 -1.00
state price effect 0.1750
controls 0.77 cross-price effect -0.0024
-0.07
trade & price effect -0.3391
investment -0.80 barriers cross-price effect 0.0207
0.39
inward price effect 0.5310
oriented 1.64
regulations cross-price effect -0.0011 -0.03
foreign price effect -0.2168
ownership -0.96 barriers cross-price effect 0.0103
0.37
regulatory price effect -0.8247
barriers -1.99 cross-price effect 0.0769
1.68
tariffs price effect 1.1370
2.69
cross-price effect -0.0959 -2.06
country dummies yes yes yes yes yes yes yes yes
adj R2 0.10 0.19 0.10 0.10 0.13 0.10 0.12 0.15 obs 178 178 178 178 178 178 178 178
Note: t-statistics in italics
29
APPENDIX 1A: COMPOSITE DEMAND APPROACH. SHORT RUN GRAVITY ESTIMATIONS FOR SERVICES IMPORTS.
TRANSPORT SERVICES IMPORTS
product entrepreneur state trade & inward foreign regulatory tariffs
SERVICES IMPORTS market barriers controls investment oriented ownership barriers
regulation barriers regulations barriers
log (GDP) 1.6549 1.8845 1.6298 1.7120 1.7176 1.3995 1.8495 1.9408
5.15 6.25 5.24 5.34 5.40 5.48 6.71 6.76
log (pop) -6.8138 -6.7605 -7.4020 -6.5134 -7.3510 -6.1546 -9.0090 -5.9986
-2.36 -2.28 -2.47 -2.23 -2.52 -2.25 -2.88 -2.24
log (dist) -2.6988 -2.2707 -2.8314 -2.4806 -2.7131 -2.6487 -2.3546 -1.7124
-2.66 -2.00 -2.65 -2.61 -2.37 -2.66 -2.39 -1.79
product market price effect -0.0048 regulation -0.05
cross-price effect -0.0248
-1.49
entrepreneur price effect 0.1889
barriers 0.94
cross-price effect -0.0278 -1.55
state price effect -0.0556
controls -0.73 cross-price effect -0.0132
-1.26
trade & price effect 0.0922
investment 1.08 barriers cross-price effect -0.0346
-1.54
inward price effect -0.0175
oriented -0.14
regulations cross-price effect -0.0185 -1.35
foreign price effect -0.0623
ownership -1.15 barriers cross-price effect -0.0162
-1.56
regulatory price effect -0.2008
barriers -1.39 cross-price effect 0.0584
1.71
tariffs price effect 0.2968
2.46
cross-price effect -0.0355 -2.14
country dummies yes yes yes yes yes yes yes yes
adj R2 0.53 0.53 0.52 0.53 0.52 0.56 0.51 0.60 obs 101 101 101 101 101 101 101 101
Note: t-statistics in italics
30
APPENDIX 1B: COMPOSITE DEMAND APPROACH. SHORT RUN GRAVITY ESTIMATIONS FOR SERVICES FDI.
BUSINESS SERVICES FDI
product entrepreneur state trade & inward foreign regulatory tariffs
FDI market barriers controls investment oriented ownership barriers
regulation barriers regulations barriers
log (GDP) 5.9154 7.0547 6.5719 5.4190 6.6302 5.9979 5.9801 6.0276
4.26 5.02 4.63 5.20 4.31 6.10 6.52 4.18
log (pop) 2.9374 2.6199 2.1976 4.0902 2.3177 2.6320 5.6985 2.1303
0.45 0.38 0.32 0.66 0.34 0.40 0.88 0.31
log (dist) -6.1889 -5.2507 -5.3036 -6.7416 -5.2760 -5.7512 -4.8028 -5.9480
-1.59 -1.37 -1.32 -1.88 -1.31 -1.73 -1.34 -1.50
product market price effect 0.4660 regulation 0.28
cross-price effect -0.0922
-0.52
entrepreneur price effect 2.1196
barriers 0.80
cross-price effect -0.2166 -0.80
state price effect 0.5465
controls 0.45 cross-price effect -0.0666
-0.52
trade & price effect 1.1757
investment 0.73 barriers cross-price effect -0.2178
-1.07
inward price effect 0.7832
oriented 0.44
regulations cross-price effect -0.0895 -0.50
foreign price effect 0.6240
ownership 0.79 barriers cross-price effect -0.1061
-1.12
regulatory price effect 1.5535
barriers 0.61 cross-price effect -0.2411
-0.71
tariffs price effect -0.0236
-0.01
cross-price effect -0.0167 -0.09
country dummies yes yes yes yes yes yes yes yes
adj R2 0.71 0.71 0.71 0.72 0.71 0.72 0.71 0.71 obs 107 107 107 107 107 107 107 107
Note: t-statistics in italics
31
APPENDIX 1B: COMPOSITE DEMAND APPROACH. SHORT RUN GRAVITY ESTIMATIONS FOR SERVICES FDI.
COMMUNICATION SERVICES FDI
product entrepreneur state trade & inward foreign regulatory tariffs
FDI market barriers controls investment oriented ownership barriers
regulation barriers regulations barriers
log (GDP) 8.2458 6.3444 8.1682 9.2513 6.6747 10.0605 8.2166 6.8162
5.67 5.62 5.46 7.04 4.90 6.65 7.55 6.70
log (pop) -4.4922 -0.6721 -4.0266 -8.0677 -1.7192 -8.8532 -3.1124 -2.2349
-0.51 -0.09 -0.45 -0.87 -0.22 -0.90 -0.40 -0.33
log (dist) 7.0260 5.5826 6.8803 7.8973 4.9903 9.2094 8.5397 3.1635
1.47 1.29 1.38 1.84 1.03 2.28 2.17 0.78
product market price effect 0.4028 regulation 0.63
cross-price effect -0.0951
-0.89
entrepreneur price effect -1.4393
barriers -2.52
cross-price effect 0.0627 0.68
state price effect 0.2097
controls 0.40 cross-price effect -0.0624
-0.76
trade & price effect 1.1632
investment 1.62 barriers cross-price effect -0.1731
-1.27
inward price effect -0.6636
oriented -1.08
regulations cross-price effect -0.0294 -0.34
foreign price effect 0.7570
ownership 1.72 barriers cross-price effect -0.0710
-1.02
regulatory price effect -0.8522
barriers -1.05 cross-price effect 0.2456
1.40
tariffs price effect -0.1966
-0.32
cross-price effect -0.0872 -0.92
country dummies yes yes yes yes yes yes yes yes
adj R2 0.66 0.68 0.66 0.67 0.67 0.68 0.67 0.71 obs 115 115 115 115 115 115 115 115
Note: t-statistics in italics
32
APPENDIX 1B: COMPOSITE DEMAND APPROACH. SHORT RUN GRAVITY ESTIMATIONS FOR SERVICES FDI.
CONSTRUCTION SERVICES FDI
product entrepreneur state trade & inward foreign regulatory tariffs
FDI market barriers controls investment oriented ownership barriers
regulation barriers regulations barriers
log (GDP) -0.4660 0.6401 -0.0034 -0.2177 -0.1305 0.3288 0.2300 1.2295
-0.71 1.07 -0.01 -0.40 -0.21 0.55 0.48 1.89
log (pop) 7.6611 5.2092 6.6907 7.5884 6.3109 6.6097 7.0502 4.9011
2.02 1.30 1.70 2.10 1.61 1.67 1.82 1.21
log (dist) -7.3691 -6.0456 -6.9054 -6.9128 -7.1913 -6.2128 -6.1368 -4.7398
-3.41 -2.74 -3.01 -3.49 -3.17 -3.04 -3.21 -2.01
product market price effect -0.8930 regulation -2.05
cross-price effect 0.0476
0.85
entrepreneur price effect -0.1692
barriers -0.33
cross-price effect 0.0011 0.02
state price effect -0.4790
controls -1.62 cross-price effect 0.0305
0.82
trade & price effect -0.8438
investment -2.01 barriers cross-price effect 0.0588
0.83
inward price effect -0.6827
oriented -1.63
regulations cross-price effect 0.0339 0.70
foreign price effect -0.3057
ownership -1.63 barriers cross-price effect 0.0290
0.81
regulatory price effect -0.9596
barriers -1.48 cross-price effect 0.0890
0.75
tariffs price effect 0.2329
0.55
cross-price effect -0.0136 -0.26
country dummies yes yes yes yes yes yes yes yes
adj R2 0.36 0.32 0.34 0.38 0.34 0.33 0.42 0.32 obs 143 143 143 143 143 143 143 143
Note: t-statistics in italics
33
APPENDIX 1B: COMPOSITE DEMAND APPROACH. SHORT RUN GRAVITY ESTIMATIONS FOR SERVICES FDI.
FINANCE SERVICES FDI
product entrepreneur state trade & inward foreign regulatory tariffs
FDI market barriers controls investment oriented ownership barriers
regulation barriers regulations barriers
log (GDP) 3.3879 4.1752 3.1927 3.7638 3.4472 3.9674 4.0439 3.7928
5.23 7.09 5.07 6.29 5.40 5.98 7.74 6.69
log (pop) -5.6404 -6.3536 -5.8851 -5.6332 -6.0361 -6.1105 -6.0948 -5.4257
-2.06 -2.08 -2.20 -1.95 -2.13 -1.99 -2.05 -1.97
log (dist) -3.7673 -2.4527 -4.5703 -2.9754 -3.7582 -2.7643 -2.4830 -3.4343
-2.41 -1.56 -2.78 -2.05 -2.29 -1.92 -1.70 -2.28
product market price effect -0.7023 regulation -1.80
cross-price effect 0.0349
0.79
entrepreneur price effect -0.2798
barriers -0.64
cross-price effect 0.0272 0.59
state price effect -0.5553
controls -2.01 cross-price effect 0.0176
0.58
trade & price effect -0.6011
investment -1.43 barriers cross-price effect 0.0459
0.70
inward price effect -0.6446
oriented -1.68
regulations cross-price effect 0.0321 0.84
foreign price effect -0.2615
ownership -1.04 barriers cross-price effect 0.0197
0.58
regulatory price effect -0.9030
barriers -1.08 cross-price effect 0.1287
0.91
tariffs price effect -0.3838
-1.19
cross-price effect 0.0208 0.54
country dummies yes yes yes yes yes yes yes yes
adj R2 0.55 0.53 0.56 0.54 0.55 0.54 0.55 0.54 obs 178 178 178 178 178 178 178 178
Note: t-statistics in italics
34
APPENDIX 1B: COMPOSITE DEMAND APPROACH. SHORT RUN GRAVITY ESTIMATIONS FOR SERVICES FDI.
TRANSPORT SERVICES FDI
product entrepreneur state trade & inward foreign regulatory tariffs
FDI market barriers controls investment oriented ownership barriers
regulation barriers regulations barriers
log (GDP) 0.4959 2.0971 0.5468 0.5893 0.8560 0.6117 0.7363 3.3658
0.31 1.19 0.32 0.44 0.51 0.39 0.67 2.03
log (pop) 21.0482 16.2392 21.8266 22.8403 18.7148 23.7785 24.2131 4.4700
1.74 1.32 1.75 1.86 1.53 1.93 2.37 0.30
log (dist) -2.1690 -1.1124 -1.4415 -1.0175 -2.5384 0.1600 0.0640 -2.5217
-0.35 -0.22 -0.23 -0.17 -0.41 0.03 0.01 -0.45
product market price effect 0.0376 regulation 0.02
cross-price effect -0.0990
-0.51
entrepreneur price effect 2.3042
barriers 0.98
cross-price effect -0.3043 -1.22
state price effect -0.2178
controls -0.18 cross-price effect -0.0286
-0.21
trade & price effect 0.0253
investment 0.02 barriers cross-price effect -0.0644
-0.27
inward price effect 0.2045
oriented 0.12
regulations cross-price effect -0.1151 -0.63
foreign price effect -0.1422
ownership -0.16 barriers cross-price effect -0.0095
-0.08
regulatory price effect 0.2521
barriers 0.13 cross-price effect -0.0944
-0.35
tariffs price effect 3.6316
2.68
cross-price effect -0.4051 -2.43
country dummies yes yes yes yes yes yes yes yes
adj R2 0.32 0.32 0.31 0.32 0.31 0.31 0.33 0.36 obs 101 101 101 101 101 101 101 101
Note: t-statistics in italics
35
APPENDIX 2A: LONG RUN TRADITIONAL AND COMPOSITE APPROACH ESTIMATION. TOTAL SERVICES IMPORTS.
SERVICES IMPORTS TRADITIONAL COMPOSITE DEMAND APPROACH APPROACH
product entrepreneur state trade & inward foreign regulatory tariffs
market barriers controls investment oriented ownership barriers regulation barriers regulations barriers
equilibrium correction ( ) -0.0653 -0.1460 -0.1506 -0.1422 -0.1252 -0.1487 -0.1372 -0.0822 -0.1197 -3.56 -5.18 -5.45 -4.94 -4.65 -5.25 -4.66 -3.25 -4.43
log FDI (-1) 1.2698 7.33
product market price effect -3.0970
regulation -5.09 cross-price effect 0.3128
4.29
entrepreneur price effect -3.4875 barriers -5.60
cross-price effect 0.3248
5.07
state price effect -2.1423
controls -4.93
cross-price effect 0.2265 4.13
trade & price effect -4.0755
investment -4.11
barriers cross-price effect 0.4228 3.65
inward price effect -2.6390
oriented -5.36 regulations cross-price effect 0.2671
4.57
foreign price effect -1.7170 ownership -4.31
barriers cross-price effect 0.1667
3.43
regulatory price effect -2.4710
barriers -1.67
cross-price effect 0.2247 1.49
tariffs price effect -4.1267
-4.19
cross-price effect 0.4016
4.04
country dummies yes yes yes yes yes yes yes yes yes adj R2 0.36 0.14 0.15 0.13 0.12 0.14 0.11 0.03 0.11
obs 190 180 180 180 180 180 180 180 180
Note: t-statistics in italics
36
APPENDIX 2A: SHORT RUN COMPOSITE APPROACH ESTIMATION . TOTAL SERVICES IMPORTS. LONG RUN SAMPLE.
product entrepreneur state trade & inward foreign regulatory tariffs SERVICES IMPORTS market barriers controls investment oriented ownership barriers
regulation barriers regulations barriers
log (GDP) 1.0483 1.2163 0.9713 0.9861 1.1057 0.7880 1.0662 1.1371 7.26 7.19 6.89 6.88 7.74 6.03 7.50 7.93
log (pop) -0.5140 -0.6741 -0.3964 -0.5457 -0.5196 -0.3699 -0.6349 -0.7344 -1.30 -1.70 -0.96 -1.31 -1.35 -0.90 -1.46 -2.09
log (dist) -1.3387 -1.3104 -1.5092 -1.5908 -1.2378 -1.9465 -1.7648 -1.5391
-3.29 -2.95 -3.68 -3.66 -3.09 -4.93 -3.88 -3.52
product market price effect -0.2155
regulation -1.80
cross-price effect 0.0309 2.38
entrepreneur price effect -0.0212
barriers -0.12 cross-price effect 0.0163
1.03
state price effect -0.1377 controls -1.51
cross-price effect 0.0172
1.60
trade & price effect -0.3294
investment -2.53
barriers cross-price effect 0.0387 2.68
inward price effect -0.1302
oriented -1.11 regulations cross-price effect 0.0237
2.04
foreign price effect -0.1867 ownership -2.86
barriers cross-price effect 0.0133
1.80
regulatory price effect -0.0921
barriers -0.78
cross-price effect 0.0117 0.98
tariffs price effect -0.0177
-0.08
cross-price effect 0.0062
0.33
country dummies yes yes yes yes yes yes yes yes adj R2 0.63 0.65 0.62 0.63 0.64 0.65 0.62 0.62
obs 180 180 180 180 180 180 180 180
Note: t-statistics in italics
37
APPENDIX 2B: LONG RUN TRADITIONAL AND COMPOSITE APPROACH ESTIMATION. TOTAL SERVICES FDI.
FDI TRADITIONAL COMPOSITE DEMAND APPROACH APPROACH
product entrepreneur state trade & inward foreign regulatory tariffs
market barriers controls investment oriented ownership barriers regulation barriers regulations barriers
equilibrium correction ( ) -0.0033 -0.0325 -0.0669 -0.0386 -0.0001 -0.0542 -0.0095 0.0083 -0.0123 -0.09 -1.51 -3.20 -1.86 -0.01 -2.45 -0.55 0.51 -0.73
log IMPORTS (-1) 17.1519 0.10
product market price effect -19.6094
regulation -1.77 cross-price effect 1.6663
1.51
entrepreneur price effect -26.9023 barriers -4.38
cross-price effect 2.3448
4.04
state price effect -12.8625
controls -2.09
cross-price effect 1.0661 1.72
trade & price effect -2500.0000
investment -0.01
barriers cross-price effect 276.4362 0.01
inward price effect -17.4365
oriented -3.16 regulations cross-price effect 1.4716
2.71
foreign price effect -22.9961 ownership -0.59
barriers cross-price effect 2.2404
0.56
regulatory price effect -45.4919
barriers -0.53
cross-price effect 4.9169 0.52
tariffs price effect -47.8577
-0.78
cross-price effect 4.3394
0.76
country dummies yes yes yes yes yes yes yes yes yes adj R2 0.52 0.10 0.17 0.11 0.07 0.13 0.08 0.07 0.09
obs 173 172 172 172 172 172 172 172 172
Note: t-statistics in italics
38
APPENDIX 2B: SHORT RUN COMPOSITE APPROACH ESTIMATION . TOTAL SERVICES FDI. LONG RUN SAMPLE.
product entrepreneur state trade & inward foreign regulatory tariffs FDI market barriers controls investment oriented ownership barriers
regulation barriers regulations barriers
log (GDP) 2.9909 2.9479 3.0064 3.3825 2.8077 3.6234 3.5673 3.5515 8.51 9.02 8.48 11.36 7.80 12.44 16.37 11.08
log (pop) -1.7655 -2.1010 -2.0320 -1.9323 -1.9301 -2.2323 -2.4100 -2.0669 -2.12 -2.48 -2.40 -2.30 -2.39 -2.37 -2.87 -3.00
log (dist) -2.9994 -2.3243 -3.0786 -2.8541 -2.914 -2.3191 -2.7596 -3.4497
-2.75 -2.31 -2.77 -2.59 -2.78 -2.18 -2.61 -3.19
product market price effect -1.7131
regulation -2.75
cross-price effect 0.1450 2.42
entrepreneur price effect -3.1044
barriers -3.75 cross-price effect 0.2777
3.66
state price effect -1.1844 controls -2.55
cross-price effect 0.0992
2.21
trade & price effect -1.1383
investment -1.73
barriers cross-price effect 0.0991 1.40
inward price effect -2.0770
oriented -3.18 regulations cross-price effect 0.1773
2.99
foreign price effect -0.7150 ownership -2.10
barriers cross-price effect 0.0739
2.11
regulatory price effect -2.6277
barriers -2.81
cross-price effect 0.2767 2.74
tariffs price effect 0.1621
0.31
cross-price effect -0.0301
-0.64
country dummies yes yes yes yes yes yes yes yes adj R2 0.80 0.81 0.81 0.80 0.81 0.79 0.81 0.79
obs 172 172 172 172 172 172 172 172
Note: t-statistics in italics
39
APPENDIX 3A: COMPOSITE DEMAND APPROACH. SHORT RUN GRAVITY ESTIMATIONS FOR SERVICES IMPORTS. LONG RUN SAMPLE.
BUSINESS SERVICES IMPORTS
product entrepreneur state trade & inward foreign regulatory tariffs
SERVICES IMPORTS market barriers controls investment oriented ownership barriers
regulation barriers regulations barriers
log (GDP) 0.5377 1.2014 0.4781 0.4352 0.7677 0.4617 0.6338 1.0284
1.31 3.69 1.22 1.37 2.01 1.48 2.35 3.44
log (pop) 5.9388 5.3714 5.9803 6.2451 5.6543 5.6822 5.3197 5.1265
3.76 3.55 3.83 3.99 3.75 3.77 3.16 3.32
log (dist) -2.3295 -2.0015 -2.4243 -2.3885 -2.1180 -2.5847 -2.5157 -2.0602
-3.40 -3.25 -3.34 -3.71 -3.16 -3.91 -4.09 -3.17
product market price effect -0.0949 regulation -0.59
cross-price effect 0.0187
1.00
entrepreneur price effect 0.2663
barriers 1.69
cross-price effect -0.0109 -0.55
state price effect -0.0811
controls -0.72 cross-price effect 0.0123
0.90
trade & price effect -0.1963
investment -1.86 barriers cross-price effect 0.0338
1.67
inward price effect 0.0202
oriented 0.13
regulations cross-price effect 0.0107 0.60
foreign price effect -0.0986
ownership -1.53 barriers cross-price effect 0.0094
1.03
regulatory price effect -0.2786
barriers -2.66 cross-price effect 0.0643
2.74
tariffs price effect 0.1189
1.26
cross-price effect -0.006 -0.46
country dummies yes yes yes yes yes yes yes yes
adj R2 0.71 0.73 0.71 0.72 0.71 0.72 0.73 0.71 obs 99 99 99 99 99 99 99 99
Note: t-statistics in italics
40
APPENDIX 3A: COMPOSITE DEMAND APPROACH. SHORT RUN GRAVITY ESTIMATIONS FOR SERVICES IMPORTS. LONG RUN SAMPLE.
COMMUNICATION SERVICES IMPORTS
product entrepreneur state trade & inward foreign regulatory tariffs
SERVICES IMPORTS market barriers controls investment oriented ownership barriers
regulation barriers regulations barriers
log (GDP) 2.0614 2.0018 1.9774 2.3741 1.9476 2.8938 3.5430 2.3972
3.67 3.78 3.41 5.21 3.60 7.53 9.74 3.53
log (pop) -14.5127 -15.1925 -13.9874 -15.7270 -14.2248 -18.9249 -17.1062 -13.6748
-5.07 -5.00 -4.78 -5.77 -4.87 -7.51 -6.02 -3.90
log (dist) -3.0535 -3.6320 -3.1806 -2.6582 -3.3495 -2.4924 -1.9692 -2.9065
-1.85 -2.04 -1.88 -1.75 -1.94 -1.78 -1.23 -1.55
product market price effect -0.7121 regulation -2.63
cross-price effect 0.1169
4.01
entrepreneur price effect -0.8406
barriers -3.79
cross-price effect 0.0915 3.25
state price effect -0.4675
controls -2.29 cross-price effect 0.0712
3.49
trade & price effect -1.1082
investment -4.14 barriers cross-price effect 0.1786
5.25
inward price effect -0.6085
oriented -2.55
regulations cross-price effect 0.0843 3.39
foreign price effect -0.5583
ownership -4.85 barriers cross-price effect 0.1051
5.87
regulatory price effect -0.2039
barriers -0.44 cross-price effect 0.0446
0.71
tariffs price effect -0.4756
-2.10
cross-price effect 0.0516 2.00
country dummies yes yes yes yes yes yes yes yes
adj R2 0.55 0.55 0.53 0.57 0.54 0.61 0.47 0.48 obs 104 104 104 104 104 104 104 104
Note: t-statistics in italics
41
APPENDIX 3A: COMPOSITE DEMAND APPROACH. SHORT RUN GRAVITY ESTIMATIONS FOR SERVICES IMPORTS. LONG RUN SAMPLE.
CONSTRUCTION SERVICES IMPORTS
product entrepreneur state trade & inward foreign regulatory tariffs
SERVICES IMPORTS market barriers controls investment oriented ownership barriers
regulation barriers regulations barriers
log (GDP) 1.5434 0.2226 1.5634 1.3364 1.2358 1.1315 0.6749 0.7876
1.91 0.36 1.99 1.73 1.71 1.37 1.02 1.16
log (pop) -14.1110 -12.4618 -13.7114 -14.5605 -12.8874 -13.9813 -13.4627 -12.1626
-3.04 -2.61 -3.00 -3.01 -2.83 -2.72 -2.74 -2.65
log (dist) -1.7376 -3.9086 -1.2426 -2.5497 -1.8887 -2.8974 -3.8201 -2.6717
-0.78 -1.80 -0.54 -1.29 -0.79 -1.46 -1.91 -1.16
product market price effect 0.1747 regulation 0.55
cross-price effect 0.0555
0.82
entrepreneur price effect -0.3694
barriers -0.80
cross-price effect 0.0353 0.54
state price effect 0.1568
controls 0.65 cross-price effect 0.0427
0.92
trade & price effect -0.0071
investment -0.02 barriers cross-price effect 0.0703
0.75
inward price effect 0.1268
oriented 0.38
regulations cross-price effect 0.0438 0.78
foreign price effect 0.0619
ownership 0.31 barriers cross-price effect 0.0225
0.55
regulatory price effect -0.1904
barriers -0.24 cross-price effect 0.0572
0.37
tariffs price effect -0.0518
-0.11
cross-price effect 0.0299 0.41
country dummies yes yes yes yes yes yes yes yes
adj R2 0.08 0.05 0.09 0.08 0.07 0.07 0.05 0.06 obs 131 131 131 131 131 131 131 131
Note: t-statistics in italics
42
APPENDIX 3A: COMPOSITE DEMAND APPROACH. SHORT RUN GRAVITY ESTIMATIONS FOR SERVICES IMPORTS. LONG RUN SAMPLE.
FINANCE SERVICES IMPORTS
product entrepreneur state trade & inward foreign regulatory tariffs
SERVICES IMPORTS market barriers controls investment oriented ownership barriers
regulation barriers regulations barriers
log (GDP) 0.7999 1.8192 0.7381 -0.1104 1.2886 -0.1667 -0.0330 1.5432
1.20 2.63 1.20 -0.17 2.03 -0.24 -0.06 2.53
log (pop) 3.2044 2.3736 3.4936 4.1814 3.0354 4.0188 3.9577 1.2810
1.22 1.03 1.29 1.35 1.22 1.35 1.39 0.67
log (dist) -2.4023 -1.5859 -2.3358 -3.8567 -1.5549 -3.9321 -3.7982 -2.1778
-1.26 -0.88 -1.17 -2.09 -0.81 -2.03 -2.10 -1.14
product market price effect -0.0264 regulation -0.08
cross-price effect 0.0372
0.90
entrepreneur price effect 0.8619
barriers 1.66
cross-price effect -0.0142 -0.31
state price effect -0.0022
controls -0.01 cross-price effect 0.0234
0.73
trade & price effect -0.6128
investment -1.50 barriers cross-price effect 0.0579
1.11
inward price effect 0.2567
oriented 0.87
regulations cross-price effect 0.0255 0.75
foreign price effect -0.3613
ownership -1.71 barriers cross-price effect 0.0326
1.33
regulatory price effect -1.1752
barriers -2.73 cross-price effect 0.1202
2.33
tariffs price effect 0.9513
2.44
cross-price effect -0.0763 -1.77
country dummies yes yes yes yes yes yes yes yes
adj R2 0.10 0.17 0.10 0.10 0.12 0.11 0.15 0.14 obs 160 160 160 160 160 160 160 160
Note: t-statistics in italics
43
APPENDIX 3A: COMPOSITE DEMAND APPROACH. SHORT RUN GRAVITY ESTIMATIONS FOR SERVICES IMPORTS. LONG RUN SAMPLE.
TRANSPORT SERVICES IMPORTS
product entrepreneur state trade & inward foreign regulatory tariffs
SERVICES IMPORTS market barriers controls investment oriented ownership barriers
regulation barriers regulations barriers
log (GDP) 1.5259 1.6659 1.5059 1.5644 1.5928 1.2139 1.6433 1.7722
4.29 5.09 4.46 4.54 4.55 4.59 5.74 5.62
log (pop) -6.0149 -5.9110 -6.2765 -5.8477 -6.2482 -5.0352 -6.9098 -5.5451
-1.99 -1.84 -2.02 -1.93 -2.04 -1.83 -2.19 -2.00
log (dist) -1.8736 -1.6664 -1.8750 -1.7987 -1.7653 -1.9715 -1.5934 -1.1889
-2.51 -1.86 -2.52 -2.57 -2.11 -2.73 -2.32 -1.56
product market price effect -0.0047 regulation -0.06
cross-price effect -0.0116
-0.68
entrepreneur price effect 0.1098
barriers 0.59
cross-price effect -0.0155 -0.86
state price effect -0.0325
controls -0.52 cross-price effect -0.0040
-0.37
trade & price effect 0.0507
investment 0.62 barriers cross-price effect -0.0186
-0.81
inward price effect 0.0117
oriented 0.11
regulations cross-price effect -0.0078 -0.56
foreign price effect -0.0651
ownership -1.46 barriers cross-price effect -0.0105
-1.05
regulatory price effect -0.0856
barriers -1.02 cross-price effect 0.0280
1.41
tariffs price effect 0.2054
1.76
cross-price effect -0.0211 -1.24
country dummies yes yes yes yes yes yes yes yes
adj R2 0.47 0.48 0.46 0.48 0.47 0.52 0.47 0.52 obs 89 89 89 89 89 89 89 89
Note: t-statistics in italics
44
APPENDIX 3B: COMPOSITE DEMAND APPROACH. LONG RUN GRAVITY ESTIMATIONS FOR SERVICES IMPORTS.
BUSINESS SERVICES IMPORTS
product entrepreneur state trade & inward foreign regulatory tariffs
SERVICES IMPORTS market barriers controls investment oriented ownership barriers
regulation barriers regulations barriers
equilibrium correction ( ) -0.1475 -0.1388 -0.1523 -0.1340 -0.1497 -0.1479 -0.1109 -0.1190
-4.33 -3.99 -4.47 -4.06 -4.33 -4.44 -3.27 -3.68
product market price effect -1.4364
regulation -4.00
cross-price effect 0.2147 2.77
entrepreneur price effect -1.6331
barriers -3.44 cross-price effect 0.2128
2.99
state price effect -0.9956 controls -3.83
cross-price effect 0.1507
2.83
trade & price effect -1.8715
investment -3.72
barriers cross-price effect 0.3657 2.69
inward price effect -1.2418
oriented -3.70 regulations cross-price effect 0.1827
3.02
foreign price effect -0.9669 ownership -4.20
barriers cross-price effect 0.1166
2.22
regulatory price effect -2.1842
barriers -2.40
cross-price effect 0.5191 2.15
tariffs price effect -1.8621
-3.15
cross-price effect 0.2734
2.72
country dummies yes yes yes yes yes yes yes yes adj R2 0.18 0.14 0.19 0.18 0.18 0.20 0.08 0.15
obs 99 99 99 99 99 99 99 99
Note: t-statistics in italics
45
APPENDIX 3B: COMPOSITE DEMAND APPROACH. LONG RUN GRAVITY ESTIMATIONS FOR SERVICES IMPORTS.
COMMUNICATION SERVICES IMPORTS
product entrepreneur state trade & inward foreign regulatory tariffs
SERVICES IMPORTS market barriers controls investment oriented ownership barriers
regulation barriers regulations barriers
equilibrium correction ( ) -0.3134 -0.2972 -0.3072 -0.3131 -0.3037 -0.2878 -0.2004 -0.2863
-6.59 -6.44 -6.51 -6.38 -6.50 -6.03 -5.08 -5.89
product market price effect -2.0730
regulation -4.91
cross-price effect 0.2721 3.70
entrepreneur price effect -2.0340
barriers -4.15 cross-price effect 0.2598
3.27
state price effect -1.3710 controls -4.23
cross-price effect 0.1821
3.60
trade & price effect -3.1522
investment -4.82
barriers cross-price effect 0.4335 4.25
inward price effect -1.6426
oriented -3.99 regulations cross-price effect 0.2186
3.22
foreign price effect -1.4465 ownership -3.95
barriers cross-price effect 0.1984
3.14
regulatory price effect -1.4691
barriers -0.76
cross-price effect 0.1651 0.60
tariffs price effect -1.9040
-3.82
cross-price effect 0.2393
3.19
country dummies yes yes yes yes yes yes yes yes adj R2 0.27 0.25 0.26 0.25 0.26 0.23 0.15 0.22
obs 104 104 104 104 104 104 104 104
Note: t-statistics in italics
46
APPENDIX 3B: COMPOSITE DEMAND APPROACH. LONG RUN GRAVITY ESTIMATIONS FOR SERVICES IMPORTS.
CONSTRUCTION SERVICES IMPORTS
product entrepreneur state trade & inward foreign regulatory tariffs
SERVICES IMPORTS market barriers controls investment oriented ownership barriers
regulation barriers regulations barriers
equilibrium correction ( ) 0.0000 -0.3430 -0.3456 -0.3508 -0.3454 -0.3453 -0.3412 -0.3492
-0.80 -8.51 -8.78 -8.75 -8.71 -8.67 -8.43 -8.68
product market price effect 2200.0000
regulation 0.09
cross-price effect 3000.0000 .
entrepreneur price effect 0.1267
barriers 0.15 cross-price effect 0.0607
0.47
state price effect 0.2734 controls 0.57
cross-price effect 0.0966
1.12
trade & price effect 0.2231
investment 0.25
barriers cross-price effect 0.0826 0.47
inward price effect 0.3473
oriented 0.57 regulations cross-price effect 0.1033
0.99
foreign price effect 0.4238 ownership 0.95
barriers cross-price effect 0.0027
0.03
regulatory price effect 1.8707
barriers 1.12
cross-price effect -0.3539 -1.05
tariffs price effect -0.0360
-0.04
cross-price effect 0.0795
0.61
country dummies yes yes yes yes yes yes yes yes adj R2 -0.03 0.37 0.40 0.38 0.39 0.38 0.37 0.38
obs 131 131 131 131 131 131 131 131
Note: t-statistics in italics
47
APPENDIX 3B: COMPOSITE DEMAND APPROACH. LONG RUN GRAVITY ESTIMATIONS FOR SERVICES IMPORTS.
FINANCE SERVICES IMPORTS
product entrepreneur state trade & inward foreign regulatory tariffs
SERVICES IMPORTS market barriers controls investment oriented ownership barriers
regulation barriers regulations barriers
equilibrium correction ( ) -0.2020 -0.1995 -0.2008 -0.2051 -0.2012 -0.2079 -0.2137 -0.1958
-6.38 -6.15 -6.35 -6.46 -6.33 -6.56 -6.75 -6.06
product market price effect -2.1615
regulation -2.13
cross-price effect 0.2400 1.81
entrepreneur price effect -2.5525
barriers -1.94 cross-price effect 0.2607
1.93
state price effect -1.4280 controls -2.10
cross-price effect 0.1676
1.76
trade & price effect -3.1667
investment -2.38
barriers cross-price effect 0.3666 1.99
inward price effect -1.8564
oriented -2.07 regulations cross-price effect 0.2024
1.85
foreign price effect -1.6724 ownership -2.57
barriers cross-price effect 0.1904
2.00
regulatory price effect -4.5347
barriers -2.86
cross-price effect 0.4973 2.58
tariffs price effect -0.7807
-0.56
cross-price effect 0.1029
0.65
country dummies yes yes yes yes yes yes yes yes adj R2 0.21 0.21 0.21 0.22 0.21 0.22 0.23 0.18
obs 160 160 160 160 160 160 160 160
Note: t-statistics in italics
48
APPENDIX 3B: COMPOSITE DEMAND APPROACH. LONG RUN GRAVITY ESTIMATIONS FOR SERVICES IMPORTS.
TRANSPORT SERVICES IMPORTS
product entrepreneur state trade & inward foreign regulatory tariffs
SERVICES IMPORTS market barriers controls investment oriented ownership barriers
regulation barriers regulations barriers
equilibrium correction ( ) -0.1645 -0.1544 -0.1699 -0.1506 -0.1629 -0.1903 -0.1495 -0.1320
-4.83 -4.72 -5.13 -4.45 -4.90 -5.40 -4.62 -4.06
product market price effect -0.8271
regulation -2.51
cross-price effect 0.0570 1.11
entrepreneur price effect -1.1346
barriers -2.13 cross-price effect 0.0659
1.25
state price effect -0.6884 controls -2.77
cross-price effect 0.0408
1.09
trade & price effect -0.6729
investment -1.98
barriers cross-price effect 0.0912 1.28
inward price effect -0.8824
oriented -2.42 regulations cross-price effect 0.0522
1.17
foreign price effect -0.4964 ownership -3.24
barriers cross-price effect 0.0198
0.65
regulatory price effect -0.7106
barriers -1.09
cross-price effect 0.1491 0.89
tariffs price effect -0.2766
-0.66
cross-price effect 0.0670
1.34
country dummies yes yes yes yes yes yes yes yes adj R2 0.32 0.31 0.33 0.31 0.32 0.36 0.28 0.29
obs 89 89 89 89 89 89 89 89
Note: t-statistics in italics